Right of a Trustee to Bid at Foreclosure Sale

Transcription

1 Marquette Law Review Volume 21 Issue 2 February 1937 Article 1 Right of a Trustee to Bid at Foreclosure Sale Otto H. Breidenbach Follow this and additional works at: Part of the Law Commons Repository Citation Otto H. Breidenbach, Right of a Trustee to Bid at Foreclosure Sale, 21 Marq. L. Rev. 61 (1937). Available at: This Article is brought to you for free and open access by the Journals at Marquette Law Scholarly Commons. It has been accepted for inclusion in Marquette Law Review by an authorized administrator of Marquette Law Scholarly Commons. For more information, please contact megan.obrien@marquette.edu.

2 MARQUETTE LAW REVIEW VOLUME XXI FEBRUARY, 1937 NUMBER TWO RIGHT OF A TRUSTEE TO BID AT FORECLOSURE SALE OTno H. BREIDENBACH T HE right of "a trustee under a trust deed to bid, where the trust deed securing the bonds does not expressly confer upon him the right to bid for trust property at foreclosure sale, is constantly being questioned in connection with the form of judgment to be entered, on petitions for such authority before sale or again on motions for confirmation. Since the trustee purchases for the benefit of all bondholders, the purchase involves no cash distribution. The trustee need pay in cash only such portion of the bid as represents prior charges, such as expense of sale, and may pay the balance by having the amount thereof credited on all of the bonds pro rata. Many trust deeds of course contain provisions expressly authorizing trustee purchase and the validity of such provisions has generally been sustained over the objection of minority bondholders insisting upon the usual type of sale involving a cash distribution for dissenters. The cases are sharply divided and differ widely in their views upon the question of the right of trustee purchase in the absence of express provision in the trust deed. One of the earliest cases confirming the right of the trustee to bid for the benefit of all bondholders is Nay Aug Lumber Company v. Scranton Trust Company,' a Pennsylvania case. The rule there declared became known as the Pennsylvania rule. The opposite view seems to have been first taken by a federal '.Nay Aug Lumber Company v. Scranton Trust Company, 240 Pa. 500, 87 At. 843 (1913).

3 THE MARQUETTE LAW REVIEW [Vol. 21 court in the leading case of Werner, Harris & Buck v. Equity Trust Company, 2 decided in the Circuit Court of Appeals. The Wisconsin Supreme Court has not passed upon the question. The circuit courts however have quite generally authorized trustees to purchase at the foreclosure sale for the use and benefit of all bondholders, granting such authority either by the decree itself through appropriate provisions or by order made upon petition before sale or have approved the purchase by the trustee upon confirmation. The better practice, I believe, is to grant such authority by the decree itself where the circumstances warrant it. By doing so proper provisions may be made in time for determining the rights and status of bondholders after sale; also for the purpose of cutting off the rights of creditors of bondholders, who might assert claims to the property after the sale. Those courts that have recognized the right of trustee purchase in the absence of express provision in the trust deed have, in most instances, grounded their decisions upon the principle that courts of equity have inherent power to authorize a departure from the provisions of the trust instrument in cases of exigency or emergency, so that the principal purpose of the trust may effectually be carried out, or have declared that such power in the absence of express provision in the trust mortgage must be implied. It is quite futile to try to reconcile the various decisions upon the question. The general principle for such authority was clearly stated in Nay Aug Lumber Co. v. Scranton Trust Company, a case frequently cited, where it was said: "It is difficult to see why a trustee should not bid at a foreclosure sale, if it be necessary to protect the interest of the bondholders. * * * Where such power is not explicitly given, it may very well be implied. * * * It seems clear that the trustee has implied power to purchase for the bondholders. At least he has such implied power to bid in their behalf in an amount equal to the principal and interest due on the mortgage. * * * It has been said that the duty of the trustee does not end with the institution and prosecution of the foreclosure suit, but his duty requires him to attend the sale and protect the right of the bondholders, and if necessary to bid in the property; this right it seems exists independently of the terms of the mortgage." 3 In that case the trustee had not petitioned the court prior to the sale for authority to purchase on behalf of the bondholders, nor were there any general provisions in the judgment of foreclosure granting such right. It was held notwithstanding that he had the right acting in good faith to make the bid for the protection of all bondholders. 2 Werner, Harris & Buck v. Equity Trust Company, 35 F. (2d) 513 (C.C.A_ 10th, 1929). 3 Nay Aug Lumber Company v. Scranton Trust Company, 240 Pa. 500, 87 AtI. 843, 844 (1913).

4 1937] RIGHT OF TRUSTEE TO BID It is of course the general rule, well sustained by authority, that one who holds property in a fiduciary capacity cannot purchase that property at his own sale. This rule applies to trustees generally, such as executors, administrators, agents, corporate officers and testamentary trustees. The rule should not, however, be confused with the question of trustee purchase where the purchase is for the benefit and use of all bondholders. No one view of this question is entitled to be regarded as established by the weight of authority. I believe that the doctrine that the trustee may be authorized to purchase for the benefit of bondholders is followed in more of the jurisdictions which have considered the point. The authorities are reviewed at great length by the Kansas court in the case of the First National Bank v. Neil, 4 and by the Illinois court in the recent case, Chicago Title & Trust Company v. Robbin. 5 Both are able and learned opinions discussing the authorities exhaustively. The Kansas case upholds the right of the court to authorize trustee purchase while the Illinois case repudiates the doctrine. In the former case, the court considers the Pennsylvania rule more convincing than that obtaining in the federal courts, holding that the trial court properly authorized the trustee to purchase, at least under circumstances where there were no bidders when the property was first offered, basing such right upon the implied power of the trustee and upon the right of the court of equity to depart from the terms of the trust deed itself when necessary to afford adequate protection to bondholders. The petition in that case was made for authority to bid, which was opposed by one of the minority bondholders on the ground that if the trustee were allowed to bid in the property for the benefit of bondholders, the property would have to be partitioned among bondholders or again resold by the trustee and that the dissenting bondholder did not desire to participate as beneficiary in the purchase of the property but desired to receive his proportionate amount of the proceeds of the sale in satisfaction of his bond. Oddly enough, this objection that partition might be necessary seems to have been repeatedly asserted by dissenting bondholders in the cases considered. In upholding the right of the trustee to bid, the court, in the Kansas case just mentioned, based its decision upon the broad ground stating: "What were the rights of the minority bondholder as opposed to the remaining bondholders? While his rights are not in any sense to be ignored, over-looked or frittered away, can he determine the course of action that the remaining bondholders must pursue? * * * We are not convinced by the reasoning of Equitable Trust Company v. U. S. Oil & Refinery Company and Wer- 4 First National Bank v. Neil, 137 Kan. 436, 20 P. (2d) 528 (1933). 5 Chicago Title & Trust Co. v. Robbin, (Ill. 1935) 198 N.E. 4.

5 THE MARQUETTE LAW REVIEW [Vol. 21 ner, Harris & Buck v. Equitable Trust Company [those are the leading federal cases denying the right of trustee purchase], that, at least under the deed of trust under consideration, the holder of the one hundred dollar bond or eleven one hundred dollar bonds can say that he may gamble as he will with his bonds and be the sole judge of whether the trustee can bid for him or not and that the court cannot say, under all of the equities of the case, that the trustee shall bid on behalf of all the bondholders. We are persuaded that the holding of the Pennsylvania court in Nay Aug Lumber Co. v. Scranton Trust Company, supra, that there is no reason why a trustee shall not be permitted to bid at a foreclosure sale, if it be necessary to protect the interest of bondholders, is more reasonable and equitable and should be followed." 6' Even those cases recognizing the right of the trustee to purchase quite generally hedge him about with the statement that a positive and definite rule cannot be laid down as to when the court should make an order permitting the trustee under a deed of trust where specific authority is lacking to bid on behalf of bondholders and that the terms and conditions to be fixed by the court must. necessarily depend on the existing facts and circumstances. In an Illinois appellate court decision, Straus v. Chicago Title & Trust Company, 7 the rule was laid down that notwithstanding the lack of specific authority in the trust deed, the trustee not only had such implied authority but that it was his duty to bid at the sale on behalf of all bondholders. "It is the universal rule of law," the court said, "that a trustee is in duty bound to see that the property entrusted to his care is not lost to the bondholders. Courts will take judicial notice that property sold under foreclosure seldom, if ever, brings a figure at all commensurate with its value, that under the present financial condition of the country, there is a great depression in the values of real estate, that a foreclosure sale of property will bring far less now than in normal times. * * * In these circumstances we think the property in question ought not to be sold at a price which will result in gross loss to the bondholders, if it can be avoided by having the property bid in for the amount of the indebtedness, by the trustee, for their use and benefit."' To read this excerpt, indeed to read the entire opinion, one would think that if the trustee purchase were not ordered, the property would be sold to an outsider for whatever it would bring and the bondholders would lose everything but a nominal cash distribution. O First National Bank v. Neil, 137 Kan. 436, 20 P. (2d) 528, 534 (1933). 7Straus v. Chicago Title & Trust Co., 273 Ill. App. 63 (1933). 8 Straus v. Chicago Title & Trust Co., supra, note 7, p. 67.

6 1937] RIGHT OF TRUSTEE TO BID In an able discussion of the subject of the protection of minority bondholders in foreclosures and receiverships by Mr. Wilbur G. Katz in an article in the University of Chicago Law Review'D the author discusses the effect of this holding of the Illinois court. He says: "The decision of the Illinois Appellate Court in Straus v. Chicago Title & Trust Company came in 1933 when some reorganizations had been effected through the usual committee procedure and many others were ready for the final steps. The suggestion that it might be the duty of a trustee to bid if no sale could be had at the full value of the property was a complete surprise to the bar. Damage suits were instituted on behalf of non-assenting bondholders against trustees who had failed to do so. Counsel for committees, after some months of confusion, adopted rather generally the expedient of making all bondholders parties to the foreclosure suit individually or by representation in order to secure a binding adjudication as to the necessity of a bid by the trustee." About a year after the decision in the Straus case, the case of Chicago Title & Trust Company v. Bamburg' 0 was decided and this case reversed the principle and held that a trustee was not only under no duty to bid at a sale but that he had no authority to bid even if he wished to do so unless such authority was specifically conferred upon him by the trust deed. The same principle was affirmed in Chicago Title & Trust Company v. Robbin, = a recent case. The Straus case, however, is interesting because it discusses the objections so frequently made by dissenting bondholders opposed to trustee purchase. It was there contended by dissenting bondholders that under trustee purchase bondholders would become tenants in common of the mortgaged property which would thereupon be subject to liens of their judgment creditors and to the inchoate rights of dower and urged the further objection, to which I have already referred, that each of the bondholders, as tenants in common, would be entitled, as a matter of right, to maintain an action for partition and that, therefore, the trustee could not pass a merchantable title. That objection by dissenting bondholders is not a valid one, certainly not in Wisconsin. But even if such technical objection were made, it can easily be overcome by provisions in the judgment of foreclosure, which would readily obviate the objection that the title of the property would be incumbered or clouded by judgments of the numerous beneficiaries of former bondholders or by dower claims. The judgment of foreclosure permitting trustee purchase therefore should expressly provide that the trustee holds as trustee of 9Katz, Protection of Bondholders in Foreclosures and Receiverships (1936) 3 U. OF CHi. L. REv ' Chicago Title & Trust Co. v. Bamburg, 278 Ill. App. 1 (1934). 11 Chicago Title & Trust Co. v. Robbin, (Ill. 1935) 198 N.E. 4.

7 THE MARQUETTE LAW REVIEW [Vol. 21 an active trust and that the interests of the beneficiaries shall be solely in the proceeds of the ultimate sale. In such cases it has been held that the interests of the beneficiaries are personally for purposes of dower, judgment liens and so forth. Courts have so held in the so-called land trust agreement cases. Thus you determine by the decree of foreclosure what might otherwise be left a troublesome matter if application for authority of the trustee to purchase is deferred until hearing upon petition before sale or if left to be passed upon by the court upon confirmation. If the court has power to authorize such purchase, it has power to declare the result to be an active trust with all of the characteristics of such trust declared by Section of the Wisconsin Statutes, which reads as follows: "Every express trust, valid as such in its inception, except as herein otherwise provided, shall vest the whole estate in the trustees, subject only to the execution of the trust; and the person for whose benefit the trust was created shall take no estate or interest in the lands, but may enforce the performance of the trust." I am not contending that by virtue of this statute the trustee becomes the trustee of an active trust after purchase at foreclosure sale, but merely point to it to show that after the court by its decree extends the active trust already created by the trust deed, even the characteristics of the trust outlined by the section continue to obtain. But the power itself to make such provision must be found in the inherent power of the equity court to protect bondholders under a trust deed and cestuis generally. The provisions in the decree of foreclosure should be made to provide, and usually does, that the trustee get a deed and "hold, manage, operate, lease, sell, and convey and otherwise deal with the real estate in question as such trustee, for the use and benefit of the owners and holders of the outstanding bonds and interest coupons subject, however, to the further order and direction of the court," and it should be further ordered and decreed that the "right, title and interest of the owners and holders of said bonds and interest coupons in said trust be and are declared to be personal property and not real estate, and the only right, title and interest of bondholders to any assets of said trust shall be to receive their proportionate share of the income, proceeds and avails of said real estate or other assets of the trust." I have discussed the Straus case because of its interesting discussion of the development of the rule but lest I have given the impression by that case that Illinois adheres to the doctrine that the trustee may purchase for bondholders in the absence of express authority in the trust deed, I should here call attention to the fact that in Chicago Title

8 19371 RIGHT OF TRUSTEE TO BID & Trust Company v. Robbin,' 2 decided June 18, 1935, the supreme court of that state, putting its decision on the broad ground that the court of equity lacked jurisdiction to order trustee purchase in the absence of appropriate provision in the trust mortgage, definitely disapproved the doctrine in the Straus case, an intermediate appellate court decision, and apparently outlawed trustee purchases entirely in Illinois whether sought by a majority, as was the case in Lieberman v. Schoenlenk, 3 or by the minority where no express provision therefore has been made by the trust deed. An objection frequently made by dissenting bondholders is that after sale, the trustee holds title merely of a dry and passive trust. This objection too becomes rather academic when we consider that it may easily be overcome by appropriate provisions in the foreclosure judgment. In a recent Connecticut case, Hoffmann v. First Bond & Mortgage Company of Hartford, Inc.,' 4 the court squarely met this objection by saying: "Clearly up to the time of foreclosure sale, the defendant was and acted as trustee of an express trust created by the mortgage, with active powers and duties thereunder. No express provision is made for subsequent sale by the trustee in case of its own purchase at the foreclosure sale, and the appellant maintains that upon such purchase the defendant became a mere passive depositary of the property and holds the bare legal title without discretion and without active duties, so that the cestuis que trustent are entitled to possession of the property and may call upon the trustee for a conveyance of the legal estate. * ** It would be absurd to regard the trustee's duty as terminated at the very time when its protection would be most needed. * ** In an emergency a court of equity may, for the preservation of the trust and the protection of the beneficiaries from loss, even authorize a trustee to depart from the terms of the agreement." An instance of the exercise of this power by a court of equity to authorize a departure from the provisions of a trust deed is seen in a recent decision in a New Jersey court, New Jersey National Bank v. Lincoln Mortgage Company,' 5 where the court used this striking language: "It is of course quite true that ordinarily the trustee is bound, in the administration of the trust, by the terms of the trust, and that even this court has no right to authorize the trustee to depart therefrom; but it is also true that a court of equity, in its capacity as universal trustee, may in cases of emergency, for the preservation of the 12 Chicago Title & Trust Co. v. Robbin, (Ill. 1935) 198 N.E Lieberman v. Schoenlank, 279 Ill. App. 467 (1935). 1 4 Hoffman v. First Bond & Mortgage Co. of Hartford, 116 Conn. 320, 164 Ati. 656, 657, 658 (1933). 15 New Jersey National Bank v. Lincoln Mortgage Co., 105 N.J. Eq. 557, 148 Ati. 713, 715 (1930).

9 THE MARQUETTE LAW REVIEW [Vol. 21 trust estate and the protection of the cestuis, authorize and direct the trustees to do acts which under the terms of the trust and under ordinary circumstances they would have no power to do. This power resides in the Court of Chancery as a part of its original inherent jurisdiction-its general administrative jurisdiction in cases of trusts." But this broad view of the equity power of the court has by no means been generally recognized. And we must not lose sight of the fact that there is sharp division in the authorities and it may be somewhat difficult to say on what side lies the weight of authority. The federal courts, the courts of Michigan, Colorado and now Illinois take the opposite view. The Michigan Supreme Court in a recent decision in Detroit Trust Company v. Stormfeltz-Lovely Company, 1 held unconstitutional a statute empowering the trustee to bid where the trust deed lacked such provision. A federal case frequently cited is Werner, Hatrris & Buck v. Equitable Trust Company. The court in that case affirmed the decision of the trial court refusing to confer upon the trustee authority to bid for the benefit of all bondholders where the trust deed contained no provision authorizing him to do so. The court said: "The trust deed contained no provision authorizing the trustee to bid at the sale for and on behalf of the bondholders. * * * Upon due consideration of the matter, the trial court correctly came to the conclusion that there was no power in the court to compel the holder of a single bond to participate in a bid for the property, if he did not wish to do so; that the rights of bondholders were measured by their bonds and the trust deed securing the same, and, absent any provision therein authorizing the trustee to bid for and on behalf of the bondholders, there was no power in the courts to confer such authority upon the trustee. * * * Each bondholder has the absolute right to determine for himself, in case of default, whether he shall take his loss and quit, or continue to gamble; if the property is sold at public sale, he has a right to take his proportion of the best bid that can be secured in cash and cannot be compelled to become an owner of an undivided interest in the property." The obvious comment upon this decision is of course that a bondholder should not, as a practical matter or a matter of justice, to other bondholders, have the absolute right to determine for himself, in case of default, whether he shall take his loss and quit or continue to gamble. The Colorado Supreme Court in denying the right of the trustee to purchase for bondholders sarcastically characterized the situation fol- 'r Detroit Trust Co. v. Stormfeltz-Loveley Co., 257 Mich. 655, 242 N.W. 227 (1932). " 1Werner, Harris & Buck v. Equitable Trust Company, 35 F. (2d) 513, 514 (C.C.A. 10th, 1929).

10 19371 RIGHT OF TRUSTEE TO BID lowing trustee purchase as "a glorified receivership.""' The Michigan case I have referred to is interesting. The court declared the statute authorizing purchase by the trustee unconstitutional largely on the ground that it impaired the contract rights of the non-assenting bondholders. The statute was further held objectionable because it provided a special type of proceeding but failed to require any notice to nonassenting bondholders. The court held that the act seriously impaired the obligation of contract of the non-assenting bondholders because there was a deviation from the express trust created by the trust deed under which the non-assenting bondholders are the cestuis. The court seemed to recognize that a deviation from the express trust may be upheld by a court of equity in an exigency or emergency not contemplated by the trust deed but held that the case did not present such an emergency. The court said: "A bondholder has the right to insist upon his contract, even if eventually he should fare worse by insisting upon his share of a sale for cash together with the right to look to the responsibility of the mortgagor for a proportionate share of the deficiency. He is not bound to become an' owner in common of a beneficiary interest of a trust which may run on for many years and from which he may realize cash, stocks, bonds, or other securities, that eventually may net him more or less than the amount he would have received had the property been sold for cash."'" The recent case of Chicago Title & Trust Company v. Robbin, 20 already referred to, is constantly cited in support of the contention that the trustee has no right to bid. It was determined in that case that the powers granted to a trustee in a deed of trust are not to be liberally construed, that the trustee's powers exist only in the terms creating the trust and that the court has not the power to import into the contract other or additional provisions or to extend the provisions. The trial court, it was held, could not authorize the trustee to bid at the sale over the protest of the holders of some of the bonds for the reason that the trust deed required the sale to be for cash and consequently the court was wholly without power to strip the bondholders of their contract rights without consent and throw them into a joint ownership venture. The court said: "The fact that a majority of the bondholders wanted the trustee to bid makes no difference. * * * It is our opinion that here the Chancellor had no inherent power to order the trustee to bid at the foreclosure sale, and thus, in effect, make a new contract between the parties." It is interesting to note here that Is Cosmopolitan Hotel, Inc. v. Colorado Natil. Bank, 96 Colo. 62, 40 P. (2d) 245 (1935). '19 Detroit Trust Co. v. Stormfeltz-Loveley Co., 257 Mich. 655, 242 N.W. 227, 230 (1932). 20 Chicago Title & Trust Co. v. Robbin, (Ill. 1935) 198 N.E. 4.

11 THE MARQUETTE LAW REVIEW [Vol. 21 the court in this case further held that a court of equity had no right to fix an upset price, below which the property could not be sold, in this respect differing radically from the principle laid down in our Suring Bank case. 2 oa While the Wisconsin Supreme Court has not passed upon the precise question we have for discussion, it has clearly and emphatically stated the rule with respect to duties of the trustee with respect to vigilance and diligence in protecting bondholders when effectuating the principal purpose of the trust deed. In Schroeder, trustee, v. Arcade Theater Co. 21 Justice Doerfler, writing the opinion, said: "Trustees under the provisions of a trust deed in some respects represent the bondholders and in other respects the mortgagors and still other respects both bondholders and mortgagors." In that case the owner of a 99 year lease on real estate erected a substantial building and placed a large bond issue maturing five years from its date, and subsequently made a fifteen year lease with a theater company, which expended large sums in making alterations of the building. It was held that: "The fact that representatives of the Theater Company before any default in the conditions of the trust deed interviewed the trustee and discussed the terms of the proposed lease and the trustee approved both the lease and the proposed alterations did not make the trust deed subject to the lease as the trustee was not authorized expressly or by necessary implication by any of the provisions of the trust deed to subject the trust deed to a subsequently made lease. '22 The court said: "A further legal doctrine must be borne in mind, and that is that the provisions of a mortgage are not personal to the party named in it as mortgagee but are for the benefit and security of the real owner of the debt secured thereby. * * * It becomes quite clear that in order to ascertain and determine the rights of a trustee under a trust deed or mortgage, it is necessary to look to and examine closely the provisions of the trust deed, for under such trust deed there is created not only the very office of the trustee but also his various duties, obligations, and powers At first blush it might appear that this case points to the denial of the right of the trustee to purchase on behalf of all bondholders, and indeed I notice that this case has been cited in one of the decisions I have already referred to in support of the doctrine that the power of the trustee must be strictly construed and that where no authority is expressly given to bid at the sheriff's sale, no such authority exists. The decision in the Arcade Theater case, however, does not stand for 2 OaSuring State Bank v. Giese, 210 Wis. 489, 246 N.W. 556 (1934). 21 Schroeder v. Arcade Theater Co., 175 Wis. 79, 103, 184 N.W. 542 (1921). 22 Schroeder v. Arcade Theater Co., supra, note 21 at 80 (headnote.) 23 Schroeder v. Arcade Theater Co., supra, note 21 at 103.

12 1937] RIGHT OF TRUSTEE TO BID such proposition. It must be limited to the situation presented with reference to the right of the lessee to subject a trust deed to a subsequently made lease. The right of a court of equity to extend the powers of a trustee in an emergency in order to carry out effectually the purpose of the trust presents an entirely different question. The duty of the trustee to act with diligence and with the utmost good faith for the protection of the bondholders under all circumstances is clearly pointed out in a number of decisions by our court. In Dick & Reutermann Co. v. Hunholz, 2 4 in holding that bondholders were entitled to the appointment of a receiver even though the defaults in the mortgagor's payment of interest, taxes and insurance did not exceed the amount by which the principal of the mortgage debt had been reduced by payments, the court indicated that bondholders should be afforded this protection among other things because it said: "* * * holders of bonds secured by a trust deed are hardly in the position of a mortgagee who loaned his money on the strength of the security of mortgaged premises. They are numerous and scattered. * * * Individual bondholders are not in a position to buy in the premises at foreclosure sale and thus procure the property originally accepted as security for the mortgage debt as the ordinary mortgagee." z In Marshall & lsley Bank, Trustee v. Guaranty Investment Company 26 the trust deed provided that the trustee had the right to advance moneys to repair defaults by the mortgagor and a lien was to be reserved to him for such advances prior to the lien of the trust deed. It was determined in this case that if the trustee intends later to claim the benefits of such a stipulation, he must notify the bondholders within a reasonable time after such advances are made and that the defaults have been so prevented or so repaired. Having failed so to do, the claim of the trustee to priority over the bondholders was denied. In denying the advances of the trustee, the court said: "This required some consideration of the character and scope of the duties of such trustees. It is frankly recognized that the law governing the relationships involved in a trusteeship to secure a bond issue have not been extensively or satisfactorily developed by the courts. * * * It is our conclusion that the trustee under a bond issue does owe to the bondholders certain duties independently of the terms of the trust deed, and that these duties will be imposed regardless of any exculpatory lirovisions in the trust deed. Such a trustee has an obligation to exer- 2 4 Dick & Ruetermann Co. v. Hunholz, 213 Wis. 499, 252 N.W. 180 (1934). 25 Dick & Ruetermann Co. v. Hunholz, supra, note 24, at Marshall & Ilsley Bank v. Guaranty Investment Co., 213 Wis. 415, 250 N.W. 262 (1934).

13 THE MARQUETTE LAW REVIEW [Vol. 21 cise good faith as well as ordinary intelligence and vigilance in protecting the interests of the bondholders. 2 7 The judgment of foreclosure, following the statute, of course provides that either party or any of the parties to the action may purchase at the sale. It is sometimes contended that the trustee is such a party even though the trust mortgage contains no express provision authorizing him to bid in the property at foreclosure sale in behalf of bondholders. It is claimed that the statute should be construed to grant authority to do so and no provision is therefore necessary. This contention, however, does not seem convincing. The statute should be construed to mean that parties who are otherwise competent to do so may bid. In fact a similar provision is contained in the statutes of several of the states that have held that the trustee has no power to bid. Section of the Wisconsin Statutes provides: "The sheriff or referee upon confirmation of a sale, shall pay out of the proceeds of the sale the costs thereof and to the plaintiff or his attorney the amount adjudged due with interest or so much as the proceeds will pay; that he take a receipt therefor and file the same, and that in case of a surplus arising from the sale, the sheriff or referee shall bring the same into court and if there be a deficiency report the amount thereof." It is argued in opposition to the claim of the right of the trustee to bid that these provisions by their very language and context, using as they do the words "moneys," "pay," "proceeds," "surplus money," ''receipt," and "bring" have in contemplation a sale for cash and nothing else. By Section , our statutes provide the title to a trust estate "Shall vest the whole estate in the trustees, subject only to the.execution of the trust; and the person for whose benefit the trust was created shall take no estate or interest in the lands but may enforce the provisions of the trust. The legal title vests in the trustee and the bondholders are not necessarily parties to an action by the trustee to foreclose the property." These statutes were applied literally in State ex. rel. Ashley v. Circuit Court of Milwaukee County.2 It is argued, therefore, since the plaintiff trustee is the absolute owner of the trust mortgage, there is no reason why he should not be permitted to bid in the property at foreclosure sale to protect his interests therein. The arguments based on the provisions of the statutes, however, do not seem to me as convincing and satisfactory as the contention based upon the broad doctrine that the court of equity has inherent power to extend the provisions of the trust deed in the event 27Marshall & Ilsley Bank v. Guaranty Investment Co., supra, note 26 at 421, State ex rel. Ashley v. Circuit Court, 219 Wis. 38, 261 N.W. 737 (1935).

14 1937] RIGHT OF TRUSTEE TO BID of emergency in order to effectuate the purpose of the trust and protect the right of the bondholders. The Restatement of the Law of Trusts, recognizing the right of the trustee to bid at the sheriff's sale, states the rule as follows: "If the trustee properly holds in trust a mortgage upon real property and the mortgage is foreclosed, the trustee can properly purchase the property on foreclosure, if it is prudent to do so in order to avoid a loss although the trustee is not authorized to invest in the purchase of real property. He is under duty, however, to sell the property when he has reasonable opportunity to do so." 29 A consideration of the rules laid down by the Wisconsin Supreme Court relative to the duties of trustees where bondholders are concerned together with the general practice of equity, it seems to me, indicate that the trial court should assume such power. From a practical standpoint, while it cannot be said that trustee purchase has been a panacea for all ills of the bondholders, experience in this state, I think it may be fairly said, justifies the exercise of such authority on the part of the trial courts,---at least in the ordinary case. Where a far flung business enterprise may be involved, perhaps other practical considerations might be controlling. RESTATEMENT, TRUSTS (1935) 231, Comment a.